Swing Trading Using the 4-Hour Chart (Book 2): Trade the Fake

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You’ve spotted one!

An asset on your watchlist is finally breaking out. All the indicators line up, so you buy.

But soon after, the trend reverses.

Your indicators have failed and you lose your trade to the dreaded ‘fakeout.’

These days, fakeouts seem to be happening more often. Almost so much that they seem to be the rule rather than the exception.

Anticipate this. First comes the feint, then the real movement.

Although fakeouts can happen in any market and at any time, they occur more often during consolidation periods.

Hence, if you stick to trending markets with high volume you are less likely to come across them. But this is not always possible.

A consolidation range is when the market is undecided and the price action of an asset is moving horizontally between support and resistance. This phase occurs after a strong trend and can last for a while.

Compared to trending assets, the volume is usually lower in consolidation. This is where fakeouts thrive, especially near support or resistance levels.

Watch near the support or resistance level in a clear consolidation zone.

If there seems to be a breakout, wait to see what happens. If the breakout is real, let it go. Take no position.

If it turns into a fakeout, open your position in the opposite direction.

In other words, if the breakout is bullish, but turns into a fakeout, then you would go short.

On the 4-hour chart, you must do this within five candles of the fakeout occurring, or you will be too late.

Your profit target is the support or resistance level of the trading range, depending on whether you are going long or short.

Place your stop just beyond the high (or low for downwards breakouts) of the breakout candle.

Ensure your risk-reward ratio is at least 1:2 before entering the trade.

Flags are continuation signals and can either be bullish or bearish. This is evident by the overall trend of the asset.

The flag is a consolidation period before the trend continues.

A bull flag starts with a strong bull move which is referred to as the flagpole. It then has a pullback which forms the flag, before breaking through to the upside and continuing the bull trend.

Normally, a trader will buy at the break of the upper channel line, however, the lower channel will often be broken first, which is a sell signal.

This ‘shakes-out’ many traders and then the smart money will catch it. If you anticipate this, then you could buy in at a much cheaper price.

Triangles are another continuation pattern.

It is characterized by the trendlines narrowing into a symmetrical triangle before finally breaking out either bullish or bearish.

Fakeouts often occur when the price breaks through the trendline in one direction before shooting off in the other.

Channels can often be marked out in trending markets by tracing the support and resistance levels in the direction of the trend.

Normally, a trader will enter at support and then sell at resistance, placing the stop-loss just below support.

However, the price can break support, which will shake many traders out. Instead, if you wait for the fakeout, you can then buy on the pivot. This will also often give a much stronger move.

Read the next chapter here.

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